Benjamin Lawsky: The Man Who Picked a Fight With Wall Street

Meet the state’s top banking regulator

Project Gazelle was a banker's dream. It was quiet, discreet, and made staggering piles of money catering to clients no one else would touch. The fact that it was also illegal didn't seem to matter much. Bankers at Standard Chartered felt confident no one would notice what they were doing. And even if somebody did, history said the punishment would be a delicate slap on the wrist.

The bank was a stodgy old colonial holdover with a massive headquarters in London. It did a lot of business in Asia, clearing billions each year in profit. Sometime around 2001, the higher-ups spotted yet another place to make a buck: Iran.

The Iranian government (as well as a few private corporations) wanted to get its money out of government-run banks and into England and the Middle East. Standard was happy to help with a series of wire transfers that snaked the funds through multiple countries and, ultimately, safely abroad.

Willie Davis

Willie Davis

The scheme worked like a charm—with only one small snag: The transactions had to pass through the bank's New York offices to be converted into dollars.

At the time, such maneuvering was legal, as long as banks vetted the deals for suspicious signs. But the U.S. government believed Iran was laundering its money to finance its nuclear weapons program. So Standard—which was also transferring cash for rogue states like Libya, Sudan, and Burma—took pains to cloak any hint of suspicion.

Bank executives gave employees detailed instructions on how to pull notes from their records to hide the involvement of off-limits nations, a process known as "repair." An internal memo warned that the repair plan "MUST NOT be sent to the U.S." Between 2001 and 2007, the bank moved $250 billion through America under this system.

Repair, of course, was illegal. In law-enforcement circles, it's called "stripping," and the U.S. Justice Department had already fined five other banks more than $2 billion for doing the same thing.

That left Standard's stateside executives increasingly nervous. In 2006, Ray Ferguson, then head of Standard Chartered Americas, warned the home office in a memo that doing business with Iran could subject them all "to personal reputational damages and/or serious criminal liability."

Standard's finance director, Richard Meddings, had a terse reply to that one, which would soon be splashed across the pages of newspapers in both countries.

"You fucking Americans," he wrote back. "Who are you to tell us, the rest of the world, that we're not going to deal with Iranians?"

The transfers continued.

At some point the feds caught wind of the scheme, launching an investigation into Standard's offices in New York, London, and Dubai. The bank disclosed this, in a way, in its 2010, 2011, and 2012 annual reports, writing that it was voluntarily reviewing its "historical compliance" with U.S. law.

Yet Standard had the good fortune of being caught during the bank-friendly Obama presidency. Despite taking office as the financial industry imploded, Attorney General Eric Holder began ramping down prosecutions for bank crimes. A new pattern emerged: The feds would conduct long, meandering investigations that ended with polite fines and no admission of wrongdoing. Standard seemed destined to be handled with the same kid gloves.

Then, seemingly out of nowhere, one man at one obscure government agency got impatient.

In August of last year, the New York State Department of Financial Services (DFS) blew the lid off Project Gazelle, issuing a complaint that charged Standard with moving billions for Iranian clients, "dealings that indisputably helped sustain a global threat to peace and stability."

These were the words of a plainly seething Benjamin Lawsky, DFS's superintendent.

The rest of the report was similarly furious. "For almost 10 years," Lawsky wrote, "SCB schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees. SCB's actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins, and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity."

Lawsky wanted to know why he shouldn't pull Standard's license to operate in New York—a move that would cost the bank billions. The financial world erupted in chatter.

From a sleepy federal investigation that was going nowhere fast to punishment that threatened Standard's very existence, it was clear there was a new sheriff in town.

But who the hell was Benjamin Lawsky?

At first, no one—not the feds who'd been overshadowed by Lawsky, not Standard itself—knew quite how to take the state bureaucrat's charges (and probably a few of them were busy Googling his name). The bank was baffled and angry. The feds were, according to multiple reports, embarrassed and irritated at being outflanked. Internal memos at the Treasury Department revealed that Lawsky had informed the agency of his intentions only "hours before" announcing the charges publicly.

The blowback was nasty. Standard rejected Lawsky's "portrayal of facts," conceding that it had transferred money illegally—but only $14 million.

Next came the implication that Lawsky's move was some sort of anti-British conspiracy designed to cripple London and favor New York. Mervyn King, governor of the Bank of England, the United Kingdom's central financial institution, implied that Lawsky had gone rogue. A columnist for the Financial Times accused Lawsky of burnishing his political prospects, ignoring the fact that his target, a gubernatorial appointee, wasn't running for anything.

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The US Attorney General, Eric Holder was one of Chiquita Brands International's corporate lawyers. He secured a $25 million settlement between the Justice Department and Chiquita in 2004, when Chiquita was exposed as hiring a terrorist group to protect their plantations in Colombia.

The ultra right wing paramilitary group, the AUC was and is on the US State Department's list of foreign terrorist organizations, and it killed tens of thousands of Colombians. It is one of the bloodiest groups in Latin America.

And yet Mr. Holder has defended Chiquita for using terrorists to protect their interests in Colombia. Is this not corruption?

How can we expect a man capable of defending such associations, to fight against other corporate wrongdoers?

"Lawsky wanted to know why he shouldn't pull Standard's license to
operate in New York—a move that would cost the bank billions. The financial
world erupted in chatter."

Because then the New York State treasury wouldn't have received $340 million
from Standard that it sorely needed. Also if DFS pulled the license, Standard
could apply for a license for its New York office from the OCC and it might be
granted. Alternatively, it could apply to Connecticut for a license as UBS did
to avoid the New York State Banking Department. Also, it could serve
its New York clients from a Connecticut location.

"True, Lawsky had only managed a fine. But the settlement also
forced Standard to install a monitor for two years to watch out for
money-laundering violations, and hire permanent monitors to audit
"internal procedures."

You don't report who chooses the monitor.

"Two days later, DFS lit up Bank of Tokyo-Mitsubishi UFJ for laundering money for Iran and Burma. The department
accused the bank of conducting about $100 billion worth of illegal
transactions, fining it $250 million."

I believe this represents retroactive prosecution for something BOTM
self-reported to OFAC in 2008.

"Afterward, Lawsky briefly spent time taking reporters' questions
and pressing the flesh. In person, the 43-year-old civil servant is almost
comically clean-cut, the type of man you imagine stepping out of the shower
completely dry, clad in a suit and polished wingtips."

Lawsky is a political appointee, serving at the pleasure of Governor Cuomo.
I suspect that is the reason for the huge fines. Lawsky is Cuomo's man charged
with obtaining desperately needed cash for the state treasury.

"Barofsky is still betting on Lawsky. He says the culture of Wall
Street can be changed, but only with fines so large and punishments so strict
that banks and insurers simply have no choice but to take them seriously."

The large fines haven't prevented the scandals because they are charged to
the wrong party. The bank is a legal fiction. Every illegal
act purportedly by a bank, must really be an illegal act of a bank
executive and/or other employee. The culture could be more effectively changed
by fining the offending bank employees for every nickel they own down to
their underwear. In 19th century England, a convict's property forfeited
to the crown. Lawsky won't do this because he is not trying to change behavior,
he is trying to raise cash for a deficit laden State.

«But the U.S. government believed Iran was laundering its money to finance its nuclear weapons program. » Fine - but the Iranian government denies it has a «nuclear weapons programme» and no one has been able to show credible evidence that the country, in fact, has one. Pity that the «Voice» is willing to lend itself as a propaganda organ for the US State Department and certain other still less savoury entities....

Great piece which serves to illustrate just how much we need a Ben Lawsky in the UK . As a victim of the banking crisis which lost me my home, my livelihood and my financial future, I have been blogging about my struggle to get my "mis-sold" HBOS mortgage investigated for almost five years. As yet I, and many more like me, have achieved little because the UK banks do not fear either the consequences of their actions or being taken to task because their punishments amount to nothing more than minor tax deductable costs on the very lucrative practice of widespread banking criminality. I wrote this in an effort to add my voice to those who champion change. http://lifeafterdebts.blogspot.co.uk/2013/08/socially-useless-banking-regulation.html

@mhenriday Great! Why is Iran not allowed to conduct transactions? Because the US has been trying to topple its government for decades.

This part of the article distracts the reader. Our problems are not that SCB does transactions with Iran. Our problems are illustrated after the article moves on from the Iran story, and addresses other issues. And that part is depressing. No jail, no convictions.

Unfortunately the only person allowed to express the view that Iran should be allowed to do it and that the US has no business interfering with Iran's affairs, is the corrupt CEO of SCB